Until last September, when the banking industry came crashing down and depression loomed for the first time in my lifetime, I had never thought to read The General Theory of Employment, Interest, and Money, despite my interest in economics. I knew that John Maynard Keynes was widely considered the greatest economist of the twentieth century, and I knew of his book's extraordinary reputation. But it was a work of macroeconomics--the study of economy-wide phenomena such as inflation, the business cycle, and economic growth. Law, and hence the economics of law--my academic field--did not figure largely in the regulation of those phenomena. And I had heard that it was a very difficult book, which I assumed meant it was heavily mathematical; and that Keynes was an old-fashioned liberal, who believed in controlling business ups and downs through heavy-handed fiscal policy (taxing, borrowing, spending); and that the book had been refuted by Milton Friedman, though he admired Keynes's earlier work on monetarism. I would not have been surprised by, or inclined to challenge, the claim made in 1992 by Gregory Mankiw, a prominent macroeconomist at Harvard, that "after fifty years of additional progress in economic science, The General Theory is an outdated book. . . . We are in a much better position than Keynes was to figure out how the economy works."
We have learned since September that the present generation of economists has not figured out how the economy works. The vast majority of them were blindsided by the housing bubble and the ensuing banking crisis; and misjudged the gravity of the economic downturn that resulted; and were perplexed by the inability of orthodox monetary policy administered by the Federal Reserve to prevent such a steep downturn; and could not agree on what, if anything, the government should do to halt it and put the economy on the road to recovery. By now a majority of economists are in general agreement with the Obama administration's exceedingly Keynesian strategy for digging the economy out of its deep hole. Some say the government is not doing enough and is too cozy with the bankers, and others say that it is doing too much, heedless of long-term consequences. There is no professional consensus on the details of what should be done to arrest the downturn, speed recovery, and prevent (so far as possible) a recurrence. Not having believed that what has happened could happen, the profession had not thought carefully about what should be done if it did happen.
Baffled by the profession's disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis. And I am not alone in this judgment. Robert Skidelsky, the author of a superb three-volume biography of Keynes, is coming out with a book titled Keynes: The Return of the Master, in which he explains how Keynes differed from his predecessors, the "classical economists," and his successors, the "new classical economists" and the "new Keynesians"--and points out that the new Keynesians jettisoned the most important parts of Keynes's theory because they do not lend themselves to the mathematization beloved of modern economists. Skidelsky's summary of what is distinctive in Keynes's theory is excellent.
Skidelsky's book is flawed by its insistence on asking what Keynes would say if he were alive today (to which the only sensible answer is that no one knows), and more seriously by its insistence that "deep down," Keynes "was not an economist at all"--that he "put on the mask of an economist to gain authority, just as he put on dark suits and homburgs for life in the City" (London's Wall Street). Keynes was the greatest economist of the twentieth century. To expel him from the profession is to confirm the worst prejudices of present-day economists by embracing their bobtailed conception of their field.
The General Theory is a hard slog, though not because it is mathematical. There is some math, but it is simple and, with the exception of the formula for the "multiplier" (of which more shortly), it is incidental to Keynes's arguments. A work of elegant prose, the book sparkles with aphorisms ("It is better that a man should tyrannize over his bank balance than over his fellow-citizens") and rhetorical flights (most famously that "madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back"). But it also bristles with unfamiliar terms, such as "unit-good" (an hour's employment of ordinary labor), and references to unfamiliar economic institutions, such as a "sinking fund" (a fund in which money is accumulated to pay off a debt). And it brims with digressions, afterthoughts, and stray observations, such as: "the two most delightful occupations open to those who do not have to earn their living [are] authorship and experimental farming." Two important chapters, dealing with the "trade cycle" (that is, the business cycle--booms and busts) and with mercantilism, usury, and thrift, are deferred to the last part of the book, which is misleadingly titled "Short Notes Suggested by the General Theory."
It is an especially difficult read for present-day academic economists, because it is based on a conception of economics remote from theirs. This is what made the book seem "outdated" to Mankiw--and has made it, indeed, a largely unread classic. (Another very distinguished macroeconomist, Robert Lucas, writing a few years after Mankiw, dismissed The General Theory as "an ideological event.") The dominant conception of economics today, and one that has guided my own academic work in the economics of law, is that economics is the study of rational choice. People are assumed to make rational decisions across the entire range of human choice, including but not limited to market transactions, by employing a form (usually truncated and informal) of cost-benefit analysis. The older view was that economics is the study of the economy, employing whatever assumptions seem realistic and whatever analytical methods come to hand. Keynes wanted to be realistic about decision-making rather than explore how far an economist could get by assuming that people really do base decisions on some approximation to cost-benefit analysis.
The General Theory is full of interesting psychological observations--the word "psychological" is ubiquitous--as when Keynes notes that "during a boom the popular estimation of [risk] is apt to become unusually and imprudently low," while during a bust the "animal spirits" of entrepreneurs droop. He uses such insights without trying to fit them into a model of rational decision-making.
An eclectic approach to economic behavior came naturally to Keynes, because he was not an academic economist in the modern sense. He had no degree in economics, and wrote extensively in other fields (such as probability theory--on which he wrote a treatise that does not mention economics). He combined a fellowship at Cambridge with extensive government service as an adviser and high-level civil servant, and was an active speculator, polemicist, and journalist. He lived in the company of writers and was an ardent balletomane.
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COMMENTS (12)
The more we learn from the macroeconomic theorists the more we learn how macropolitical handlers always finds a way to feed it to the beasts on Wall Street.
Keynes, Friedman. Fiscal, monetary. Democrats, Republicans. Liberals, Conservatives. Come on, it draws more folks in or out of the economy, more folks in or out of the government. But it doesn't change the fundamental nature of crony capitalism.
And maybe it never will. And maybe it never should. I'll leave that to the ever conflicted and contradictory experts. Economists, for example. And pundits.
My point is always to pull the fig leaves off the rhetoric that adorns both the prescriptions and the proscriptions of folks in places like t ... view full comment
The more we learn from the macroeconomic theorists the more we learn how macropolitical handlers always finds a way to feed it to the beasts on Wall Street.
Keynes, Friedman. Fiscal, monetary. Democrats, Republicans. Liberals, Conservatives. Come on, it draws more folks in or out of the economy, more folks in or out of the government. But it doesn't change the fundamental nature of crony capitalism.
And maybe it never will. And maybe it never should. I'll leave that to the ever conflicted and contradictory experts. Economists, for example. And pundits.
My point is always to pull the fig leaves off the rhetoric that adorns both the prescriptions and the proscriptions of folks in places like this; intellectuals who always place the emphasis on a clash between policy, politics or principle....and hardly ever on a clash between those who vie to be in charge of the revolving doors, the campaign finance reform legislation and regulating the dastardly deeds of the lobbyists. Tweedle dee or tweedle dum some call them. I just call them Congress and the White House
But let's keep it that way, right? Let's keep it tasked to the authorized disseminators of the authorized inflection points.
george
Keynes being a revelation to Posner is, I suppose, on a par with parenthood being a revelation to young couples today. Not mentioned by Posner is the effect of concentrations of wealth. If consumption is the primary force for economic activity, then it follows that concentrations of wealth is a drag on economic activity, for the marginal propensity to consume by the wealthy is much lower. But what about the conspicuous consumption by the wealthy, from mansions to jet planes, doesn't that offset the lower propensity to consume? In the short run it does, for the mansions and planes must be produced. But in the long run do those mansions and jet planes add to the wealth, or productive capa ... view full comment
Keynes being a revelation to Posner is, I suppose, on a par with parenthood being a revelation to young couples today. Not mentioned by Posner is the effect of concentrations of wealth. If consumption is the primary force for economic activity, then it follows that concentrations of wealth is a drag on economic activity, for the marginal propensity to consume by the wealthy is much lower. But what about the conspicuous consumption by the wealthy, from mansions to jet planes, doesn't that offset the lower propensity to consume? In the short run it does, for the mansions and planes must be produced. But in the long run do those mansions and jet planes add to the wealth, or productive capacity, of the economy? Hardly. It is mindboggling that the smart folks at Chicago and other centers of conservative thought still believe that supply creates its own demand, Keynes (and history) notwithstanding. My own view is that they consider Keynes' theory (or theories) as a slippery slope, for to accept demand (consumption) as the key to economic activity not only invites government intervention into the economy (to spur demand), but raises very distrubing (to them anyway) questions about the negative effects of concentrations of wealth. And that one does not do!
While Posner these days is thought a conservative, he has never been thought a capitalist as his career as a lawyer/judge shows.
There are huge issues with the math behind Keynesian theory. The 2 mains models:
- IS/LM model
- Phillips curve
have been widely discredited as insufficient. Math doesn't work, the theory doesn't model reality. They are at best a teaching tool. And any reputable econ course views them as such.
And original Keynesion theory ignored all micro-economic theory. It has been disproven. Monetary policy works. Even the Keynesion acknowledge that though they would warn of a theoretical 'liquidity trap' where monetary policy loses effect.
Keynesian theor ... view full comment
While Posner these days is thought a conservative, he has never been thought a capitalist as his career as a lawyer/judge shows.
There are huge issues with the math behind Keynesian theory. The 2 mains models:
- IS/LM model
- Phillips curve
have been widely discredited as insufficient. Math doesn't work, the theory doesn't model reality. They are at best a teaching tool. And any reputable econ course views them as such.
And original Keynesion theory ignored all micro-economic theory. It has been disproven. Monetary policy works. Even the Keynesion acknowledge that though they would warn of a theoretical 'liquidity trap' where monetary policy loses effect.
Keynesian theory is mostly for left leaning politicians to rationalize Gov spending. The worlds central bankers use monetary policy as they know better.
There will always be business cycles. And the more Gov. involvement in a market (like Mortgage Backed Securities) amplifies the cycle. The recent recession being used by the in-effective and inept to push a euro-socialist agenda.
That agenda will fail. Best outcome, Gov as referee for markets improving transparency. Worst outcome, Gov manages any part of economy.
R:
There are huge issues with the math behind Keynesian theory. The 2 mains models:
- IS/LM model
- Phillips curve
have been widely discredited as insufficient. Math doesn't work, the theory doesn't model reality. They are at best a teaching tool. And any reputable econ course views them as such.
george:
R, I'm waiting for your rejoinder on the WealthCare thread. I proposed we begin a historic debate there about Rand, Capitalim and the dying art of silly polemics. Together, you and I can put Wealthcare back on top of the Most Views, and Most Comments blogs. Where it belongs.
Hmm...
The IS/LM model. Is that Leonard Piekoff's list of [giggle, giggle] mathematical calculations used by ... view full comment
R:
There are huge issues with the math behind Keynesian theory. The 2 mains models:
- IS/LM model
- Phillips curve
have been widely discredited as insufficient. Math doesn't work, the theory doesn't model reality. They are at best a teaching tool. And any reputable econ course views them as such.
george:
R, I'm waiting for your rejoinder on the WealthCare thread. I proposed we begin a historic debate there about Rand, Capitalim and the dying art of silly polemics. Together, you and I can put Wealthcare back on top of the Most Views, and Most Comments blogs. Where it belongs.
Hmm...
The IS/LM model. Is that Leonard Piekoff's list of [giggle, giggle] mathematical calculations used by Congress, CNBC and Wall Street to measure precisely the inflection point when laizze faire market capitalism becomes state capitalism; then becomes outright socialism? Do you, Tim Geithner and Max Baucus still edit it in the Oval Office?
The Philips curve. Isn't that the one Laffer drew on a clump of toilet paper before he and the Chicago Boys retired from the outhouse in search of napkins in a restaurant?
Modelling reality. Okay, give us the model used to calibrate derivative transactions that factor in, say, inside information, Jim Cramer, fear, campaign contributions and taxpayer bailouts.
R:
....original Keynesion theory ignored all micro-economic theory. It has been disproven. Monetary policy works.
george:
Where oh where is Roid when you need him!!!
A proposition: If anyone convinces Roid to come back in [or convinces Noam to have him released from Guantanamo] I promise to cut my Talkbacks down to less than 250 a day.
Has Keynesian macro theory been disproven by RyndDroid micro theory in the manner in which astrology has been disproven by astronomy? or alchemy disproven by chemstry? Can R provide us with a list of economists [qua physicists?] who will attest to this. Will it be longer than the Keynesians' list of economists who detest to it? Will the Right Theory be metaphysically [and romantically] sound?
And why oh why wasn't R and the other ubercapitalists in here a year ago explaining how the less than ubercapitalists on K Street and in Congress were opting for state capitalism instead? Couldn't they have saved us all a lot of grief?
R:
Keynesian theory is mostly for left leaning politicians to rationalize Gov spending. The worlds central bankers use monetary policy as they know better.
george:
Yes, the world's bankers were all over the housing bubble, weren't they? In fact, we don't know it yet but they kept feeding the Keynesians in the Bush Administration enough rope until they hanged us all. Now out of the ashes R will ride in from the Gulch with the True Believers. They'll ressurect the Gold Standard, send Alan Greenspan to a reeducation camp and set the economy to the task of finally bringing Atlas Shrugged to the silver screen. R will play both John Galt and Dagney Taggert. Rand will rise from the grave to play The Anti-Christ and President Glenn Beck will join her in finally reconciling Objectivists and Libertarians forevermore. Reconciling both transcendentally with Kant's God.
R:
There will always be business cycles. And the more Gov. involvement in a market (like Mortgage Backed Securities) amplifies the cycle. The recent recession being used by the in-effective and inept to push a euro-socialist agenda. That agenda will fail. Best outcome, Gov as referee for markets improving transparency. Worst outcome, Gov manages any part of economy.
george:
Marx couldn't have said it any better. Although he almost certainly did. Great big rhetorical bromides like this have always been the theoretical scaffolding of choice for those who dismiss the enormous complexies of the real world for the crystal clarity of, well, great big rhetorical bromides.
george walton
d/a
A wonderful piece from what has become that rarest of all things, a brilliant man with an open mind.
A wonderful piece from what has become that rarest of all things, a brilliant man with an open mind.
I agree with lsernoff. This is vintage Posner: Muscular, clear prose; well-informed argument; intellecutal seriousness without hand-wringing; skepticism of grand theory; responsiveness to the times; apparent open-mindedness; and a stubborn resistance to ideological caricature. One reason Judge Posner would face difficulty being confirmed to the Supreme Court if he were ever nominated -- and his prominent career makes him a natural candidate -- is that he writes a lot, writes a lot that doesn't fit either anodyne conventional wisdom on the one hand or rigid ideological orientations on the other, and he refuses to be bland. So, the Supreme Court's loss is the reading public's gain, I suppo ... view full comment
I agree with lsernoff. This is vintage Posner: Muscular, clear prose; well-informed argument; intellecutal seriousness without hand-wringing; skepticism of grand theory; responsiveness to the times; apparent open-mindedness; and a stubborn resistance to ideological caricature. One reason Judge Posner would face difficulty being confirmed to the Supreme Court if he were ever nominated -- and his prominent career makes him a natural candidate -- is that he writes a lot, writes a lot that doesn't fit either anodyne conventional wisdom on the one hand or rigid ideological orientations on the other, and he refuses to be bland. So, the Supreme Court's loss is the reading public's gain, I suppose.
That Judge Posner has introduced himself to Keynes and has told us about it is interesting and mildly informative. Three is no doubt the Obama administration is off on a love fest with what it believes to be Keynesian Economics -- an economics "for our time." But, I wonder. As much as one today is inclined to worship our great public thinkers, I am still concerned about the idea of debt. Just how are we to sustain the horrendous debt the United States is taking on? (Not a word about that in the Judge's piece. But, maybe I missed it. It could be part of a subtle insert.)
Keynes is fine with regard to saving capitalism for the time being -- for the short term -- but I do not recall the ... view full comment
That Judge Posner has introduced himself to Keynes and has told us about it is interesting and mildly informative. Three is no doubt the Obama administration is off on a love fest with what it believes to be Keynesian Economics -- an economics "for our time." But, I wonder. As much as one today is inclined to worship our great public thinkers, I am still concerned about the idea of debt. Just how are we to sustain the horrendous debt the United States is taking on? (Not a word about that in the Judge's piece. But, maybe I missed it. It could be part of a subtle insert.)
Keynes is fine with regard to saving capitalism for the time being -- for the short term -- but I do not recall the great hedonist said anything about taking on debt which is, well, quite simply, beyond the capacity of human comprehension, much less government repayment.
isernoff:
A wonderful piece from what has become that rarest of all things, a brilliant man with an open mind.
george:
I'm not familiar in depth with Posner. I'm not an intellectual. So, how open then is his mind on stuff like this:
* crony/state capitalism
* the military industrial complex
* the health care industrial complex
* the workings of K Street
Posner is usually associated with the laizze faire Chicago School of economics; so his trek to Keynes is certainly more welcome [to me] than had it been the other way around.
But where does he start drawing the lines in a discussion of political economy in America? In all the approproate places perhaps?
george
isernoff:
A wonderful piece from what has become that rarest of all things, a brilliant man with an open mind.
george:
I'm not familiar in depth with Posner. I'm not an intellectual. So, how open then is his mind on stuff like this:
* crony/state capitalism
* the military industrial complex
* the health care industrial complex
* the workings of K Street
Posner is usually associated with the laizze faire Chicago School of economics; so his trek to Keynes is certainly more welcome [to me] than had it been the other way around.
But where does he start drawing the lines in a discussion of political economy in America? In all the approproate places perhaps?
george
seugster:
Three is no doubt the Obama administration is off on a love fest with what it believes to be Keynesian Economics -- an economics "for our time."
george:
No doubt? Oh, please. Given the love nest Obama and Geithner Inc. has set up on Wall Street how exactly is this a solid Keynesian approach to the relationship between government and the economy? How, for example, is it wildly at odds with the Friedman apologists in the Bush Administration? What has Obama done differently? It's just a difference of degree not kind.
In the end, they all serve the same master: Whatever works to keep everything more or less exactly the same.
We are watching this unfold right now with health care "reform". ... view full comment
seugster:
Three is no doubt the Obama administration is off on a love fest with what it believes to be Keynesian Economics -- an economics "for our time."
george:
No doubt? Oh, please. Given the love nest Obama and Geithner Inc. has set up on Wall Street how exactly is this a solid Keynesian approach to the relationship between government and the economy? How, for example, is it wildly at odds with the Friedman apologists in the Bush Administration? What has Obama done differently? It's just a difference of degree not kind.
In the end, they all serve the same master: Whatever works to keep everything more or less exactly the same.
We are watching this unfold right now with health care "reform". After the legislation is signed let's start tallying up what has really changed.
george
seugster: Good question. I think the usual response is two-fold. First, debt for a money-printing entity only matters insofar as it leads to inflation -- not a problem now and not a problem given the amounts in question. I think that's a widely held, though not unanimous, view among economists. We can take on big debt -- it's not beyond human comprhension; just big -- if there's worldwide confidence in our continued prosperity. The notion that a government is like an individual and should always balance its checkbook is pointless, unrealistic, and harmful. Second, your suggestion of taking on big debt "for the short term" is, I think, perfectly Keynesian. During good times, we do re ... view full comment
seugster: Good question. I think the usual response is two-fold. First, debt for a money-printing entity only matters insofar as it leads to inflation -- not a problem now and not a problem given the amounts in question. I think that's a widely held, though not unanimous, view among economists. We can take on big debt -- it's not beyond human comprhension; just big -- if there's worldwide confidence in our continued prosperity. The notion that a government is like an individual and should always balance its checkbook is pointless, unrealistic, and harmful. Second, your suggestion of taking on big debt "for the short term" is, I think, perfectly Keynesian. During good times, we do restraint and balanced budgets and pay down debt and rely on monetary solutions to manage the economy. (See Clinton/Greenspan.) During tough times, though, we soften the blow of big downturns and avert potential economic disaster by introducing more aggressively the spender of last resort -- the government -- into the economy. I think that's roughly the idea. It's not the usual approach. But sometimes monetarist solutions are insufficient. When interest rates are zero, and we're still in free-fall, there's a problem. The model didn't work this time, as even Greenspan acknowledged. Posner is impressed by the depth of the crisis we faced and the serious threat of depression and the collective cluelessness of the profession in offering solutions. Such times call for unusual measures, but not forever. This is consistent with the Obama administration's approach. It does stimulus -- deficit spending, borrowing -- to avert calamity and soften the blow. Some say, not enough. But, when it comes to the long-term commitments, like health care, Obama insists on deficit neutrality and emphasizes cost control.
Who the heck is George? Am I missing something. Is it some inside bit?
To George:
"Whatever works to keep everything more or less exactly the same" ?
What, pray tell is that supposed to mean? The simple fact is Washington (it really does not make much difference who is in control (and the Wasilla Snobilly is not going to help -- nor are any of her handlers)). The debt is going to go over the top and for many decades to come.
And, there is going to be no way to lower it and more money will have to be printed because no one is to going to buy the debt to the degree it must needs be bought. And, of course, if you are a Keynesian or a Posnerarian (now), you will have to find a way to put mone ... view full comment
Who the heck is George? Am I missing something. Is it some inside bit?
To George:
"Whatever works to keep everything more or less exactly the same" ?
What, pray tell is that supposed to mean? The simple fact is Washington (it really does not make much difference who is in control (and the Wasilla Snobilly is not going to help -- nor are any of her handlers)). The debt is going to go over the top and for many decades to come.
And, there is going to be no way to lower it and more money will have to be printed because no one is to going to buy the debt to the degree it must needs be bought. And, of course, if you are a Keynesian or a Posnerarian (now), you will have to find a way to put money into the economy, the American one -- forget about Mexico or Canada or any other "local" econommy.
But, I am sure I am confused. Just as the rest of the 280 million or so people who live here are who do not have friendships amongst the the American Ruling Class. That is, we did not go to Yale, Harvard, Princeton, Stanford or the University of Chicago, must be confused.
George -- I would be pleased to know what you are really saying. I will steel myself to be open minded and will even try, desparately but without much success to at least appear to be intelligent.
Look for me someplace at Costco or Walmart. I would love to have a conversation with you. Truly, what the hell else are we going to do as everything collapses around us.
seug:
To George:
"Whatever works to keep everything more or less exactly the same" ?
What, pray tell is that supposed to mean? The simple fact is Washington (it really does not make much difference who is in control (and the Wasilla Snobilly is not going to help -- nor are any of her handlers)). The debt is going to go over the top and for many decades to come.
george:
Well, over the past, I don't know, century or so the folks running the healthcare industry did not lose much sleep at night worrying about whether the rampaging cost of the healthcare delivery system in America would sink the economy.
And all the other democratic republics around the globe seem to have incorporated one or another ... view full comment
seug:
To George:
"Whatever works to keep everything more or less exactly the same" ?
What, pray tell is that supposed to mean? The simple fact is Washington (it really does not make much difference who is in control (and the Wasilla Snobilly is not going to help -- nor are any of her handlers)). The debt is going to go over the top and for many decades to come.
george:
Well, over the past, I don't know, century or so the folks running the healthcare industry did not lose much sleep at night worrying about whether the rampaging cost of the healthcare delivery system in America would sink the economy.
And all the other democratic republics around the globe seem to have incorporated one or another rendition of universal healthcare for their citizens without plunging them over into the debt abyss. Maybe because unlike us they aren't spending more money on their defense budgets than all the other nations of the world combined. You think?
Besides, these silly folks somehow got it into their heads that being a citizen entitled you to healthcare. You know, just for being a citizen!! Don't fool yourself, those Commies are still out there.
seug:
But, I am sure I am confused. Just as the rest of the 280 million or so people who live here are who do not have friendships amongst the the American Ruling Class.
george:
Huh? Kindly rephrase that please.
seug:
George -- I would be pleased to know what you are really saying. I will steel myself to be open minded and will even try, desparately but without much success to at least appear to be intelligent.
george:
Making me [and my psuedo-intelligence] the argument. That sounds awful familiar. Does TNR offer classes to readers on how to perfect this? The Editors, for example. Is there an inflection point named after me yet?
Let's start with the American Ruling Class [or as I prefer to call it, crony capitalism]. Is that just a myth? Okay, let's debate it.
seug:
Look for me someplace at Costco or Walmart. I would love to have a conversation with you. Truly, what the hell else are we going to do as everything collapses around us.
george:
I'll do that. Shall me meet in the back room reserved for the union busters or the one dedicated to preserving The American Way of doing business with Congress? Your call.
george